ACCOUNTING

BASICS
UPSC-EPFO
DEFINITION AND FEATURES OF PARTNERSHIP
As per Section 4 of the Partnership Act, 1932:“Partnership is the relation between persons who have
agreed to share the profit of a business carried on by all or any of them acting for all.”
Features of a partnership
(i) Existence of an agreement
(ii) Business
(iii) Sharing of profit
(iv) Mutual agency

Number of Partners:
Minimum Partners: Two
Maximum Partners: 50.
 • The Partners are supposed to have the power to act in certain matters and not to have such
powers in others. In other words, unless a public notice has been given to the contrary,
certain contracts entered into by a partner on behalf of the partnership, even without
consulting other partners are binding and the provisions of the Act relating to the question
will apply.

• Partnership Act doesn’t specify any format for preparation of accounts of

Partnership Firm and thus accounts are prepared as per Basic rules of accounts.
The Profit and Loss Account will show the profit earned by the firm or loss suffered by it. This
profit or loss has to be transferred to the Capital Accounts of partners according to the terms
of the Partnership Deed or according to the provisions of the Indian Partnership Act (if there is
no Partnership Deed or if the Deed is silent on a particular point).

FIXED AND FLUCTUATING CAPITAL

There are two methods of accounting –

i) Fixed capital method- In Fixed capital method, generally initial capital contributions by the partners are
credited to partners’ capital accounts and all subsequent transactions and events are dealt with through
current accounts, Unless a decision is taken to change it, initial capital account balance is not changed.
ii) Fluctuating capital method- no current account is maintained. All such transactions and events are passed
through capital accounts. Naturally, capital account balance of the partners uctuates every time. So in xed capital
method a xed capital balance is maintained over a period of time while in uctuating capital method capital account
balances uctuate all the time.
Interest on Capital: A partner is not entitled to interest on his capital as a matter of right. But if
there is an agreement, that partner would receive interest on his capital it is paid at the agreed
rate only out of profits.

Net loss and Interest on Capital: Subject to contract between the partners, interest on
capitals is to be provided out of profits only. Thus in case of loss, no interest is provided. But
in case of insufficient profits (i.e., net profit less than the amount of interest on capital), the
amount of profits distributed in the ratio of capital as partners get profits by way of interest on
capital only.
Guarantee of Minimum - Sometimes, one partner can enjoy the right to have minimum amount
of profit in a year as per the terms of the partnership agreement. In such case, allocation of
profit is done in a normal way if the share of partner, who has been guaranteed minimum is more
than the amount of guaranteed profit.
However, if share of the partner is less than the guaranteed amount, he takes minimum profit
and the excess of guaranteed share of profit over the actual share is borne by the remaining
partners as per the agreement. There are three possibilities as far as share of deficiency by
other partners is concerned.
These are as follows:
• Excess is payable by one of the remaining partners.
• Excess is payable by at least two or all the partners in an agreed ratio.
• Excess is payable by remaining partners in their mutual profit sharing ratio.
If the question is silent about the nature of guarantee, the burden of guarantee is borne by the
remaining partners in their mutual profit sharing ratio.
 LIMITED LIABILITY PARTNERSHIP

• The Indian Partnership Act of 1932 provides for a general form of partnership which has
inherent shortcoming of unlimited liability of all partners for business debts and legal
consequences, regardless of their holding or profit sharing ratio, as the firm is not a legal
entity. General partners are also jointly and severally liable for tortuous acts of co-partners. In
case of liquidation personal assets of partners can be liquidated to meet liabilities of the firm.
• In order to encourage Indian professionals to participate in the international business community
without apprehension of being subject to excessive liability, the need for having a legal structure like
the LLP is encouraged. Thus in convergence towards global scenario, Limited Liability Partnership
Act, 2008 was introduced.
• The LLP will be a separate legal entity, liable to the full extent of its assets, with the
liability of the partners being limited to their agreed contribution in the LLP which may
be of tangible or intangible nature or both tangible and intangible in nature.
• No partner would be liable on account of the independent or un-authorized actions of
other partners or their misconduct.
• The liabilities of the LLP and partners who are found to have acted with intent to
defraud Creditors or for any fraudulent purpose shall be unlimited for all or any of the
debts or other liabilities of the LLP.